Firms must create a nurturing and healthy environment for talent to grow, in order to produce a strong generation of leaders.
Recent months have seen the spotlight cast firmly on company performance, and the pressure that shareholders are placing on results has seen a number of UK companies on the hunt for a new CEO.
While some organisations inevitably need to look externally for their next CEO, those that take leadership seriously have suitable internal candidates ready and waiting in the wings to take the helm. It’s what the best organisations do: they care about talent, are focused on their current and future needs, and devote time, energy and resources to developing leadership throughout the company.
There is a wealth of evidence to indicate that developing home-grown talent drives better performance.
Various Hay Group research findings demonstrate that CEOs at high-performing organisations typically spend long periods of time at their companies before taking the helm. This suggests that they are carefully developed and nurtured over a sustained period by the firms they eventually lead, as their companies pay close attention to leadership.
On the 2012 World’s Most Admired Companies (WMAC) list – produced annually by Hay Group and FORTUNE magazine – the chief executives at the top 20 companies by overall industry score boast an average length-in-service at their organisations of more than 25 years (see table). By contrast, CEOs among the lower ranks have been at their firms on average for just over 10 years.
Similarly, length-in service averages over 28 years for CEOs of organisations identified by Hay Group as the 2011 Best Companies for Leadership (BCL). In addition, the highest-performing senior executives in Hay Group’s global leadership competency database have been with their firms for more than 20 years on average.
When it comes to selecting a new CEO, organisations that emphasise talent management inevitably have a richer pool of home-grown potential to draw from. They are better placed to source the right leader at the right time from among their own.
And while internal hiring may not always automatically be the best solution, it remains the preferred practice of high-performing companies:
l While more than 90 per cent of the 2012 WMACs have well-defined CEO and executive succession plans, only 65 per cent of peer group companies are making plans to ensure top-team continuity.
l 100 per cent of the 2011 BCL companies have a sufficient number of qualified internal candidates who are ready to assume leadership positions compared to just 44 per cent at peer companies.
A long-time servant of an organisation will inevitably possess a detailed understanding of its unique intricacies that an external hire would take many years to acquire. The long-serving executive will have a ready grasp of the firm’s history, culture and structure; its all-important relationships with stakeholders, such as staff, customers, suppliers and shareholders; and the complex market environment in which it operates.
Jack Welch – who grew GE’s share price by 4,000 per cent during 20 years in charge – described himself as a gardener, providing water and nourishment to his top 750 people. He encapsulated his main duty as chief executive of GE in two fitting words: “Developing talent.”
But how do firms create a structured framework for successful talent development, in order to produce a healthy leadership pipeline?
The answer will differ between organisations. But in essence, the solution is a rigorous process of planning for the future needs of the organisation, rather than short-term wins, so as to align talent management with long-term strategic requirements.
But this is where many companies fall short. Fixated on quarterly results, they stop at asking: “What do we need today?” They fail to define a blueprint for the future.
This entails looking 10-20 years ahead to understand the strategic demands on future leaders, what the CEO role will look like as a result, and the profile of the person needed to fulfil that role. Some of the organisations most adept at talent management map out this procedure in a step-by-step leadership development manual.
Broadly speaking, the talent management process should entail four key steps:
Organisations need to ask: potential for what? What will success look like – now and in the future? What strategies will be needed? What skills, attributes and traits will be needed in a leader to deliver these?
This must be considered under various scenarios, which will demand different strategies, requiring different CEO capabilities and behaviours. One strategy may necessitate a marketing guru to create a brand that will engage new customers. Another might mean a cost focus, calling for an efficiency drive.
Next, organisations need to measure the depth of the talent pool available to them against what they need. It is vital to identify high potentials early on, along with each of their key growth factors and potential derailers. Some organisations do this by scoring talented individuals on an ongoing basis – being careful to measure potential, not current performance.
The next stage is to create a development process for people with high potential, taking their growth factors and derailers into account. This is not just about a series of modules (though these can help), but structured experiences that help leaders realise their potential, such as – the next step – job assignments.
This is succession planning in action. Designing these development processes means understanding the roles that each individual needs to experience and the lessons they need to take from each role, and “flowing” people around the organisation accordingly.
As noted, this isn’t to suggest that CEOs must always be hired internally. But a word to the wise: whether hiring internally or externally, firms should also seek independent support with strategic scenario planning, identifying what future strategies mean for the CEO role, and assessing a candidates’ fit with that role to ensure the right decision is made.
That said, for organisations that take talent management seriously, the advantages of being able to rely on home-grown talent, not to mention the positive impact on business performance, are clearly evident.